U.S. Rating Cut from AAA to AA+ by Egan Jones

The United States’ credit rating was cut from AAA to AA+ by Egan Jones this past weekend, in a move that likely received little attention from the mainstream media.

Fortunately, Zero Hedge picked up on this and included a link to the full report.

In its report, Egan Jones wrote that “The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%.”

The firm noted that although the “US’s debt is denominated in dollars, a hard default is unlikely,” it also cautioned that “History has proven that defaults on domestic public debt do occur.”

It went on to point out that “In fact, seventy out of three hundred twenty defaults since 1800 have been on domestic public debt. Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto  default.”

Unlike Moody’s, Standard & Poor’s, or Fitch – the three largest rating agencies – Egan Jones is not paid by the firms and/or governments on which it develops its ratings, but rather by investors.  As such, there is an inherent bias that is eliminated from their perspective.

Furthermore, Egan Jones was one of the few parties sounding warning signals in 2007 and 2008 over the bond insurers – MBIA and AMBAC – while the other ratings agencies failed to identify the flaws in the bond insurers until after investors had already lost significant amounts of money.

Unfortunately, most regulatory capital rules are made based on the ratings of Moody’s and S&P, and there is considerable speculation and reason to believe that these firms often receive pressure from politicians and governments to be cautious about downgrading various entities.